Cliff Swatner is certainly in a comfortable position with the actual way of life and income that he has from his work. But seeing that he desires to make a family within the upcoming 3 years then he should begin to think a little differently since a family means a rise in expenses. Certainly, he would need to plan expenses for his marriage and for his family life after that.
His current portfolio is as follows:
- A real estate asset, his apartment, that has a market value of 250,000$;
- An annual income from his job that for last year exceeded 90,000$;
- A total of 90,000$ in money invested in stock and bonds during the last several years and enough liquid assets to supplement his condominium and other tangible assets;
Everything may seem perfect for Cliff since he feels that he has a moderate risk-tolerance level. But this would be so with the present lifestyle status.
Cliff has decided to make two major changes that have a big impact on his finances. First, he intends to may within the upcoming three years. This means major financial spending for the wedding, approximately 20,000$ (which is 22.22% of his current annual income or total of invested money) and a raise in personal expenses since it will not spend only as a single anymore. The other major financial change is the decision he made to begin to accumulate funds for retirement. This means that he will take aside a good portion of the actual income and another “voice” for his expenses.
In order to confront this situation as comfortably as he can I recommend the following portfolio arrangement for Cliff.First, even though Cliff has a moderate risk-tolerance it is not advisable for him to invest the major his money in assets that have high or medium risk or return. He needs to make a diversification of his portfolio in order to balance the gain-loss ratio.
20,000$ of his investment money should be invested in stock with a max return rate profit of 7% or even less, 5%. This kind of stock is considered to be a low risk stock. The problem with this kind of stock is that they generate little profit per year. Anyway they would generate a steady flow of cash for Cliff on which he can rely as an addition to his annual income for his rising expenses for family life. In order to diversify the portfolio it is better to invest this sum not fully in one stock but at least in two stocks. This kind of investment is more secure and Cliff should not rebalance this type of investment.
The biggest share of his money, 50,000$, should be invested in stocks that have the return rate within the margins of 7%-12%. This are considered to be mid-risk stocks. In order to have the lowest losing risk possible it is better to diversify the portfolio by investing in five different stocks, 10,000$ for each, with the average return rate of 9%-10%. This way he would have invested in mid-to-low risk stocks.
This way Cliff will have a return rate of 5,000$ per year and 15,000$ for the upcoming three years. This way he will be able to cover 75% of the wedding and honeymoon expenses of 20,000$ he wishes. I propose Cliff to look for rebalance of this type of investment once a year, or a max of twice a year if better opportunities are offered in the market so that he takes the 1/5 or 2/5 of the money invested from one, or two, stocks and redirects them to the other more attractive mid-risk stocks.
The remaining 20,000$ could be invested in stocks that have a profit return rate of above 12%. These kinds of stock are considered high-risk stocks. This is why the amount of money invested is approximately equal to the return rate from the previous two types of investment. The return rate profit from these stocks can be added to the mid-risk stocks profit and cover fully the expenses of the wedding. The rebalancing of this type of investment should be done more often. I propose Cliff to watch for market analysis and prediction for the stocks high-risk stocks he has invested every quarter of year.
After the wedding the return-rate profit of the mid and high-risk stock could be added to the retirement fund.